As promised in our last in-depth analysis, we turn now to another strategy-critical capital question:  the future of credit risk transfer (CRT).  FHFA has proposed an extraordinarily-complex CRT framework designed at once to reduce reliance on pool-insurance CRT and still favor it over like-kind structures under the U.S. banking rules.  The paradox of the NPR is that, after a lengthy description of all the hazards of CRT, FHFA still goes relatively easy on it.  Its preferred approach – equity financing – could be counter-cyclical, but the new framework still allows some CRTs and thus offers considerable scope for regulatory-capital arbitrage between CRT and equity increases and within the CRT and CRM frameworks.  The new approach seeks to buttress CRT against current risks resulting from highly-leveraged counterparties, but does not or indeed could not solve for ongoing capital and operational constraints that keep big banks out of the GSE-CRT arena.

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